Chip maker Intel Corporation (NASDAQ:INTC) is planning to come up with a video service, which according to a report from Morgan Stanley (NYSE:MS), could find a niche in the highly competitive U.S. Pay-TV market. The service from Intel will enjoy the backing of its unmatched infrastructure-light cost advantages that will help the company to overcome three common weaknesses in incumbent multichannel video programming distributor (MVPD) offerings, which are outdated user interfaces, limited out of home / multi-device rights, and relatively inflexible programming / packaging.
However, the report believes that the service may not be able to achieve broad scale, because of the following reasons:
- Intel Corporation (NASDAQ:INTC) is expected to target its new service towards affluent media and tech consumers at premium pricing.
- The expansion of the service could receive setback by broadband infrastructure capacity.
- Going forward, cable/telco operators may transfer the cost of higher broadband network use back to consumers via usage-based pricing.
- Procuring digital content correctly is a highly complex process.
- Certain regulatory risks could also place hurdles.
Although content owners enjoy significant bargaining power over incumbent cable/satellite/telco video distributors according to the report, Intel Corporation (NASDAQ:INTC) should offer favorable terms to the content providers to break into the Pay-TV industry. The report expects the chip maker to ‘pay up’ both (1) to enter the space and (2) to create a product advantage via expanded content rights. This may take away the cost advantage that Intel might enjoy due to infrastructure-light video service. Also, the company may have to ‘pay up’ further through guaranteed minimums owing to its lack of scale.
If Intel Fails
If Intel Corporation (NASDAQ:INTC) is successful in procuring content rights but fails to find users for its new service, then also it could inspire the way for future online entrants. The report expects Sony and Microsoft Corporation (NASDAQ:MSFT) are the most potential candidates to replicate Intel’s service. These two gaming companies can use the base of game consoles to receive the video service, which will help to lower capital intensity and cost to the consumer. Also, if Apple Inc. (NASDAQ:AAPL) is successful in its iTV, then it could use the installed base of smart televisions to its advantage. Google Inc. (NASDAQ:GOOG), given its range of services like Google Fiber, Google TV and YouTube could also be a potential player in the segment.
And if Intel Corporation (NASDAQ:INTC) succeeds, report believes it “would bring further competition to video distribution, increasing the already strong bargaining power of content providers.”